Ethanol: Ready to Stand on its Own?

Ethanol: Ready to Stand on its Own?

Industry readies for life without the blenders’ credit, with RFS and market signals driving demand

At the end of 2011, the Volumetric Ethanol Excise Tax Credit (VEETC), which gives blenders 45 cents to blend ethanol into the gasoline supply, expired.

Jeff Broin, chief executive officer of POET, the nation's largest domestic ethanol producer, says VEETC's expiration "won't have a significant impact" on the industry, because it has become more efficient over the last 30 years at the same time the tax credit has decreased.

Gavin Maguire, Reuters market analyst, notes that blenders have been fully utilizing the blenders' credit recently in anticipation of VEETC's expiration. Blenders aggressively buying ethanol to mix into the fuel stream in recent months led to a "sustained firming in ethanol values relatively to gasoline lately."

Maguire warns that once the credit disappears, it is "very unlikely that blenders will continue to seek out ethanol with quite the same aggression…especially in light of the fact that overall gasoline demand has remained constrained in the current sluggish economic environment," he said.

Maguire noted that the ethanol market could be a "market firing on all cylinders" and warned that if the ethanol market takes a turn for the worse it "could deal a fresh blow to the corn market which is already grappling with souring fundamentals."

Domestically, ethanol production isn't expected to increase much, if at all, in 2012.

The Environmental Protection Agency (EPA) approved Growth Energy's request to increase the allowable level of ethanol in the gasoline from 10% to 15%. Broin notes that changing the fuel requirements is a "monumental task" with "daunting layers of regulations." Broin says Growth Energy, where he serves as a chairman, continues to work with the EPA on a daily basis to get E15 to the marketplace some time this year.

"If we keep this industry stifled at 10% ethanol, we will see much higher oil prices at some point in the future," Broin says. "I don't know if that's next year or five years from now or 10 years from now, but it will happen."

Broin says without the tax credit, ethanol will still provides a 16-cent cheaper alternative to gasoline. However, consumers could pay an estimated 4 cents per gallon more at the pump as the tax credit disappears, he adds.

E85 price Spike?

Interestingly, E85, a blend of 85% ethanol, could see prices increase more significantly with the tax credit expiration, and thus become less competitive. Broin expects E85 prices could jump 40 cents and may not allow for buyers to purchase E85 at an economical discount, which allows for the lower fuel efficiency of the blend.

The VEETC expiration received praises from many livestock and environmental groups, as well as taxpayer groups who have eyed the tariff as a mechanism to save in tight budgetary times.

Joel Brandenberger, president of the National Turkey Federation, said the federation "will continue to remain diligent to ensure the VEETC does not reappear and will continue to push for real reform of the Renewable Fuels Standard."

The RFS mandates that close to 14 billion gallons of renewable fuel be blended into the nation's fuel supply, but that includes advanced biofuels and biodiesel. Increased ethanol production is not expected in 2012 and production is expected to remain steady.

Hussein Allidina, head of commodity research at Morgan Stanley, says his consultants in Washington, D.C. don't see any real risk to the RFS changing anytime in the near future, partially because of the other pressing issues the government is focusing on.

The ethanol industry has advocated an extension of the cellulosic tax credit, which expires at the end of 2012. Brent Erickson, executive vice president of BIO's Industrial & Environmental Section, states, "The advanced biofuels industry is at an inflection point and is rapidly maturing because biotech companies have made significant private investments to commercialize the technology. Additional investment is needed to build commercial-scale biorefineries to produce these advanced biofuels. The cellulosic biofuels production tax credit and the accelerated depreciation for cellulosic biofuel property have the potential to unlock this vital project financing. Algae biofuels also need to be eligible for these credits. But the December 31, 2012, expiration date for these credits prevents project developers from leveraging their full value."

The biodiesel tax credit lapsed in 2010, resulting in a significant drop in production, job losses and some plant closings. Eventually, it was extended retroactively for 2010 and through 2011. Biodiesel leaders hope the tax credit can again be reinstated in 2012. A draft package of tax extenders, recently circulated by Senate leaders, includes the biodiesel incentive.

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